Cognizant CEO - learnings from the digital transformation frontline

Last week, Indian IT trade body Nasscom projected a 10-12% growth rate for the country’s software and services sector in fiscal year 2017, a healthy enough number in one respect, but lower than the 12-14% it made for fiscal 2016.

That didn’t do any immediate damage to the share prices of the likes of HCL, Wipro or Infosys, all of which saw some uptick.

But yesterday we got a sobering reminder of how fickle investors can be as Cognizant paid the price for a weak outlook, particularly in banking and healthcare.

The firm’s share price dipped 8% after forecasting revenue growth of between 10-14% for 2017. This despite that forecast being in line - and indeed, at the top end, busting the Nasscom industry projections - as well as a healthy end to fiscal 2016.

For the quarter ended December 2015, net profit was $423.4 million, compared to $362.9 million a year ago, while revenue was up nearly 18% to $3.23 billion.

But it was the cautious outlook of CEO Francisco D’Souza about the “slow start” on the buy side for its major clients in finance and healthcare that upset investors:

I feel like healthcare will have a slow start to the year, but with a very strong pipeline in the back half of the year kicking in.

I think financial services a little different as you know they have been in the last couple of months a lot of macroeconomic concerns around the world. I think as a result of that financial services particularly banking more than insurance, but our banking clients are taking a cautious approach at this point, putting some projects on hold.

It’s discretionary spend that’s at issue here, he observed:

It’s the discretionary, more development oriented stuff that tends to kick off at the early part of the year as budget get approved. I think that stuff that can turn on relatively quickly again. Obviously what’s not getting deferred is the lights-on maintenance, keep the systems running, regulatory compliance, those kinds of things obviously will continue and are continuing. But there's a fair amount of discretionary stuff that kicks off early part of the year and I think that's some of that is what we are seeing being deferred a little bit.

He added:

I don't have a good view as to when that resolves itself. I think we are going to watch that over the next quarter or two and see how it unfolds. We are baking some growth in financial services into our view going forward, but I think our view in financial services right now is sort of more of a wait and see approach.

Digital direction

As is by now traditional for the outsourcing establishment, D’Souza took the chance to outline what he sees as learnings from the “frontline” of digital transformation programs as Cognizant passes the five year mark of pursuing such deals:

The first observation from the frontlines of the digital transition is that from a technology standpoint most clients cannot make an immediate clean sheet of paper transition to a digital technology backbone. Clients will typically build a digital architecture on top of their legacy technology and the integration between these two layers is a very critical part of the transformation. Our intimate knowledge of our clients’ legacy combined with our leading-edge digital capabilities really give us an edge here.

The second observation from the frontlines of the digital transition is that a new broader set of capabilities is required to help clients to navigate the digital transition. In the digital world consulting must include both strategy consulting and design sensibilities, and end-to-end digital realization requires consulting, design, technology and industry knowledge. Our digital works model is deliberately built to combine strategy, design, technology and business consulting into one tightly integrated model.

The third observation from the frontlines of the digital transition is that now more than ever knowledge of our clients industries and processes is critically important. As our clients seek to digitize all aspects of their business, they are reinventing their business models and their processes. Our deep industry knowledge and process expertise enables us to partner with them as they work through the process of transforming their businesses into digital enterprises.

And the final observation from the frontlines of the digital transition is that as digital goes mainstream, clients need to partner with global scale and heft to support them. As clients look to rapidly scale they need the best talent at scale available across the globe. Our global footprint and team is a substantial asset in this regard.

As a case in point, D’Souza pointed to the airline industry, where:

we recently signed a strategic multi-million dollar engagement with Etihad Airways, United Arab Emirates flag carrier, to define a comprehensive digital transformation strategy. While Etihad Airways is renowned for a world-class experience in the air. They realized that customer experience starts long before the customer arrives at the airport and continues after they land.

The Cognizant digital works team and other partners are helping Etihad to envision future customer experience possibilities whether these interactions happen via the web, mobile apps or airport kiosks. As clients like Etihad navigate the challenges involved in becoming digital enterprises, we continue to build out our portfolio of offerings to help them to navigate that shift.

The digital opportunity is characterised by D’Souza as a “dynamic” one with a still volatile market out there:

I think the best analogy to draw here is sort of the analogy that we saw during the dotcom transition. What we're seeing is that digital is not just a technology issue. To really do digital well you need to combine design talent with consulting talent, with technology talent, with consulting and strategy talent and, of course, you need to bring the client's perspective into all of this.

So you need first of all a very, very diverse set of skills and capabilities. When we look at competition, originally I would say, maybe a couple of years ago, we would see a lot of smaller boutique type of firms that focused more on the design elements and what I think [of as] the front end of digital. But I think it's now migrating because clients are looking to deploy digital at global scale and integrate with their legacy applications.

The firms that we see competing most against are the large firms that have an integrated set of capabilities, where they can bring all of those capabilities together. [There are] not that many firms in the world that can bring design, consulting, technology, industry knowledge, process expertise, at global scale, together. I would say there is a small handful of two or three firms and those are the ones that we tend to compete with most often.

My take

Cognizant’s calendar-year-end has led to its forecasts being paid particularly close attention to by observers of the Indian services market. Turning in double digit growth for the December quarter was healthy. The markets punished the firm for being upfront about slowdowns in two key sectors. That said, if Cognizant’s conservative stance is accurate, Nasscom’s predictions for 2017 could soon start to look over-optimistic.

 

Disclosure - at time of writing, Infosys is a premier partner of diginomica.